The Accrual Anomaly is Not Dead: Canadian Evidence

Abstract

The accrual anomaly has generated considerable attention after being documented by Sloan (1996). Our study investigates the accrual anomaly in Canada over a 25-year sample period of 1997 to 2021. We obtain abnormal hedge portfolio returns of approximately 12 and 20 percent for firms in the S&P/TSX composite index during our 25-year sample period and its latter 10 years, respectively. These firms are a subset of larger firms that represent approximately 70 percent of our sample Toronto Stock Exchange (TSX) market value. We obtain mixed findings when including the remaining smaller firms of the TSX. This is also supported using regressions that include common control variables. These findings are useful for academics and investors because prior accrual anomaly studies on Canada show inconsistent results, and perhaps the anomaly has returned in the US, particularly since the latter part of our sample period shows higher abnormal returns related to accruals.

Keywords: Accrual anomaly, Canada, market efficiency, cash flows, earnings

JEL Classification: M41, G11